The governor of the Bank of England has given his strongest warning yet of the economic risks that a Brexit would bring, including a "technical recession", higher unemployment and high inflation.
Revealing the Monetary Policy Committee's decision to leave interest rates at 0.5% for another month, Mark Carney said inflation is forecast to rise to 0.9% by September, if the UK votes to remain in the EU.
The Bank of England also expects economic growth to pick up again in the second half of 2016, after seeing slower growth in the first half. But again, that forecast is based on the UK staying in the EU. If it leaves, however, a "technical recession" - where the economy contracts in two consecutive quarters - could follow, Mr Carney warned.
The minutes from the Committee's meeting said: "The recent behaviour of the foreign exchange market suggests that, were the UK to vote to leave the EU, sterling’s exchange rate would fall further, perhaps sharply. This would likely be consistent with changes to some of the real fundamentals that drive sterling including the terms of trade, productivity, and risk premia. In isolation, a further fall in sterling would boost inflation over the policy horizon.
"Aggregate demand would also likely fall, relative to our forecast, in the face of tighter financial conditions, lower asset prices, and greater uncertainty about the UK’s trading relationships. Households could defer consumption, and firms could delay investment. Global financial conditions could also tighten, generating potential negative spillovers to foreign activity that, in turn, could dampen demand for UK exports."
On Wednesday, top City fund manager Jim Leaviss revealed a private conversation with the Michael Saunders, the newest member of the Monetary Policy Committee, in which Mr Saunders said interest rates would rise as high as 3.5% within 18 months, the value of the pound would collapse and inflation would rise sharply.
Jeremy Cook, chief economist at the international payments company, World First, said: “Everything about the UK is being viewed through a prism of the Referendum vote, especially the poor data that the British economy has reported in the past quarter or so.
"Indeed, yesterday’s industrial production numbers from the UK which only grew by 0.3% on the month suggested that new orders were being damaged by referendum fears whilst home grown issues such as the National Living Wage and the government’s fiscal consolidation also weighed. You can look at the most recent retail sales and construction output for similar pains in UK industry."
Mike Cherry, national chairman at the Federation of Small Businesses (FSB), said: “Small firms are currently facing a great deal of global economic uncertainty and market volatility. This can be challenging to navigate as they look to plan for the future and invest in their businesses.
“Our own research shows that small business confidence is at its lowest level since 2013. Alongside a sustained period of low inflation, today’s decision from the Bank of England will provide some much-needed stability for our members and all businesses.”